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Protection of RRSP’s Upon Bankruptcy/Death

CRA

Canadian Revenue (the “CRA”), takes the position that its collection activities are not affected by provincial legislation that exempts particular assets from execution and seizure. Therefore, such RRSPs may be available to the CRA to satisfy outstanding tax liabilities. Finally, the law of fraudulent conveyances still applies to RRSPs, and if a creditor can satisfy a court that a debtor made a beneficiary designation or transferred funds to an RRSP with the intent of defrauding creditors, the assets will become available for seizure.

Insurance-based RRSPs

Insurance-based RRSPs with designated beneficiaries of any class are protected prior to and upon the annuitant’s death from the claims of creditors by provisions of the Insurance Act (Ontario), which exclude insurance proceeds from the estate of the annuitant and from the claims of his or her creditors.

Non-Insurance-based RRSP’s

NB - See Recent Updates in 2009 - It appears that many Non-Insurance based RRSP's may also qualify for excluding RRSP assets from creditor claims!!!

In Amherst, the testator of a bankrupt estate designated his wife as the beneficiary of two RRSP funds; the proceeds of which she received from the two plan administrators after his death. The bankrupt estate was unable to meet all of its debts, leading the creditor/applicant to seek payment of the estate’s debts from the beneficiary by claiming the proceeds of the RRSPs. Basing their decision on the provisions of section 53 of the Succession Law Reform Act, the Court held that the RRSP proceeds did not form part of the deceased’s estate and were not available to his creditors.

Although the Amherst decision protects non-insurance based RRSPs with designated beneficiaries from creditor access upon the death of the annuitant, it does not protect such RRSPs from the claims of creditors during the annuitant’s lifetime. The fact that such RRSPs receive no creditor protection, while insurance-based RRSPs do, has prompted the federal government to pass new legislation that will, subject to some conditions, exempt all RRSPs from seizure on a bankruptcy of the annuitant. This new legislation received Royal Assent on November 25, 2005, but will not come into force until June 30, 2006 at the earliest. The legislation amends the BIA to exclude RRSPs from the property of a bankrupt divisible amongst his or her creditors.

This creditor protection of RRSPs will be subject to some restrictions, however, in regulations to accompany the legislation that have not yet been released. In a backgrounder to the legislation produced by the federal government, there is some suggestion given as to what restrictions the regulations will impose:

It is proposed that all registered retirement savings plans and registered retirement income funds, as defined in the Income Tax Act, will be exempt from seizure subject to conditions to be prescribed by the regulations. These conditions are necessary to ensure fairness and to curb potential for abuse so that bankrupts cannot hide assets from creditors (e.g. RRSP contributions made in the last 12 months prior to bankruptcy will not be exempt from seizure; the seizure exemption only applies if the individual locks in their RRSPs and the total amount exempt will be subject to a maximum cap.)

Once this legislation comes into force, there will be some creditor protection available for noninsurance-based RRSPs during an annuitant’s lifetime, but in what manner this protection will be restricted remains to be seen.

http://www.fasken.com/EstatePlanningBulletin_Mar06